Report and Recommendation of the President to the Board of Directors

Project Number: 54189-001 June 2020

Proposed Countercyclical Support Facility Loan, Grant, and Technical Assistance Grant Republic of Maldives: COVID-19 Active Response and Expenditure Support Program Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS (as of 26 May 2020)

Currency unit – rufiyaa (Rf)

Rf1.00 = $0.0650 $1.00 = Rf15.39

ABBREVIATIONS

ADB – Asian Development Bank CARES – COVID-19 Active Response and Expenditure Support COVID-19 – coronavirus disease CPRO – COVID-19 Pandemic Response Option CSF – Countercyclical Support Facility DSA – debt sustainability assessment GBV – gender-based violence GDP – gross domestic product IMF – International Monetary Fund IPL – international poverty line km2 – square kilometer MED – Ministry of Economic Development MGFSS – Ministry of Gender, Family, and Social Services MMA – Maldives Monetary Authority MOF – Ministry of Finance MOH – Ministry of Health MSMEs – micro, small, and medium-sized enterprises PFM – public financial management RCF – Rapid Credit Facility SAARC – South Asian Association for Regional Cooperation SAP – strategic action plan SOP – standard operating procedure TA – technical assistance UN – United Nations WHO – World Health Organization

NOTES

(i) The fiscal year (FY) of the Government of Maldives and its agencies ends on 31 December.

(ii) In this report, “$” refers to United States dollars.

Vice-President Shixin Chen, Operations 1 Director General Kenichi Yokoyama, South Asia Department (SARD) Directors Takeo Konishi, Public Management, Financial Sector, and Trade

Division (SAPF), SARD Ronald Butiong, Regional Cooperation and Operations Coordination

Division (SARC), SARD Team leaders Navendu Karan, Senior Public Management Economist, SAPF,

SARD Masato Nakane, Senior Economist, SARC, SARD

Team members Brando Angeles, Associate Environment Officer, Environment, Natural Resources, and Agriculture Division (SAER), SARD

Angelique Dawn Badelles, Associate Safeguards Officer (Resettlement), Office of the Director General (SAOD), SARD

Eduardo Banzon, Principal Health Specialist, Office of the Cluster Head, Health Sector Group, Sustainable Development and Climate Change Department (SDCC)

Ricardo Carlos Barba, Principal Safeguards Specialist, Portfolio, Results and Quality Control Unit (SAOD-PR), SARD

Sanchita Basu Das, Economist, SAPF, SARD Liz Biglang-Awa, Associate Results Management Officer, SAOD-

PR, SARD Tulsi Bisht, Senior Social Development Specialist, Safeguards

Division (SDSS), SDCC Monica Mei Carino-Young, Project Analyst, SAPF, SARD Arnaud Cauchois, Principal Water Resources Specialist, SAER,

SARD Brian Chin, Social Sector Specialist, Human and Social

Development Division, SARD Mayank Choudhary, Principal Investment Specialist, Infrastructure

Finance Division 1, Private Sector Operations Division (PSOD) Asel Chyngyseva, Senior Planning and Policy Specialist, Special

Initiatives Unit, Strategy, Policy and Partnerships Department Adelita June Gacutan, Senior Operations Assistant, SAPF, SARD Manohari Gunawardhena, Financial Sector Specialist, SAPF, SARD Ma. Kristina Hidalgo, Senior Financial Sector Officer, SAPF, SARD Uzma Hoque, Senior Social Sector Specialist, Human and Social

Development Division, SARD Srinivasan Janardanam, Principal Financial Management Specialist,

SAPF, SARD Amir Jilani, Young Professional, Social Development Thematic

Group, Office of the Cluster Head (SDTC), SDCC Maria Joao Kaizeler, Senior Financial Management Specialist,

Public Financial Management Division, Procurement, Portfolio and Financial Management Department (PPFD)

Sajid Khan, Financial Management Specialist, SAOD-PR, SARD Sonalini Khetrapal, Social Sector Specialist, Human and Social

Development Division, SARD Olivier Kueny, Principal Public–Private Partnership Specialist,

Advisory Division 1, Office of Public–Private Partnership

Apurva Kumar, Investment Specialist, Private Sector Financial Institutions Division (PSFI), PSOD

Rodellyn Manalac, Operations Assistant, Urban Development and Water Division, SARD

Taisuke Miyao, Senior Procurement Specialist, Procurement Division, PPFD

Kaukab Naqvi, Senior Economist, Economic Analysis and Operational Support Division, Economic Research and Regional Cooperation Department

Ashish Narain, Principal Economist, Regional Cooperation and Integration Thematic Group (SDTC-RCI), SDCC

Adolf Moises Nicolas, Associate Operations Officer, SAOD-PR, SARD

Susan Olsen, Senior Investment Specialist, PSFI, PSOD Aileen Pangilinan, Senior Regional Cooperation Officer, SARC,

SARD Mary Grace Ramos, Associate Operations Officer, SAOD-PR,

SARD Viliami Sefesi, Principal Financial Control Specialist, Loan and

Grant Disbursement Section, Controller’s Department Lei Lei Song, Regional Economic Advisor, SAOD, SARD Asghar Ali Syed, Principal Counsel, Office of the General Counsel Deepak Taneja, Principal Treasury Specialist, Treasury Client

Solutions Unit, Treasury Department Takeru Toba, Economist, SARC, SARD Francesco Tornieri, Principal Social Development Specialist

(Gender and Development), SAOD-PR, SARD Chin-Hsin Tsai, Senior Digital Technology Specialist, Digital

Technology for Development Unit, SDCC Karma Yangzom, Principal Environment Specialist, SDSS, SDCC Peer reviewer David Robinett, Senor Public Management Specialist (State-Owned

Enterprise Reforms), Governance Thematic Group, SDCC In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page

PROGRAM AT A GLANCE

I. THE PROPOSAL 1

II. PROGRAM AND RATIONALE 2

A. Background and Development Constraints 2

B. Proposed Program and ADB’s Value Addition 9

C. Impacts of the Program 11

D. Development Financing Needs and Budget Support 11

E. Implementation Arrangements 12

III. ATTACHED TECHNICAL ASSISTANCE 12

IV. DUE DILIGENCE 13

V. ASSURANCES 15

VI. RECOMMENDATION 15

APPENDIXES

1. Design and Monitoring Framework 16

2. List of Linked Documents 19

3. Development Policy Letter 20

4. Assessment of Compliance with the COVID-19 Pandemic Response Option Access Criteria 24

Project Classification Information Status: Complete

PROGRAM AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 02062020180051482911 Generated Date: 16-Jun-2020 11:59:40 AM

1. Basic Data Project Number: 54189-001Project Name COVID-19 Active Response and

Expenditure Support ProgramDepartment/Division SARD/SAPF

Country Maldives Executing Agency Ministry of Finance (formerly Ministry of Finance and Treasury)

Borrower Republic of MaldivesCountry Economic Indicators https://www.adb.org/Documents/LinkedD

ocs/?id=54189-001-CEIPortfolio at a Glance https://www.adb.org/Documents/LinkedD

ocs/?id=54189-001-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million)Public sector management Public expenditure and fiscal management 18.00

Social protection initiatives 18.00

Health Disease control of communicable disease 7.00

Health system development 7.00

Total 50.00

3. Operational Priorities Climate Change InformationAddressing remaining poverty and reducing inequalities

Accelerating progress in gender equality

Strengthening governance and institutional capacity

Fostering regional cooperation and integration

GHG reductions (tons per annum) 0Climate Change impact on the Project

Low

ADB Financing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Cofinancing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Sustainable Development Goals Gender Equity and MainstreamingSDG 1.3, 1.5, 1.aSDG 3.8SDG 8.1, 8.8SDG 10.4SDG 11.5

Effective gender mainstreaming (EGM)

Poverty TargetingGeneral Intervention on Poverty

4. Risk Categorization: Low .

5. Safeguard Categorization Environment: B Involuntary Resettlement: C Indigenous Peoples: C.

6. Financing

Modality and Sources Amount ($ million)

ADB 50.00 Sovereign COVID19 Pandemic Response Option: Asian Development Fund 25.00 Sovereign COVID19 Pandemic Response Option (Concessional Loan): Ordinary capital resources

25.00

Cofinancing 0.00 None 0.00

Counterpart 0.00 None 0.00

Total 50.00

Note: An attached technical assistance will be financed on a grant basis by the Technical Assistance Special Fund (TASF-6) in the amount of

$500,000.

Currency of ADB Financing: US Dollar

I. THE PROPOSAL

I submit for your approval the following report and recommendation on (i) a proposed loan and (ii) a proposed grant, both to the Republic of Maldives for the COVID-19 Active Response and Expenditure Support Program, under the Countercyclical Support Facility (CSF) COVID-19 pandemic response option (CPRO).1 The report also describes proposed technical assistance (TA) for Improved Implementation of the Government’s COVID-19 Response Package, and if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, approve the TA.

Rapid increase in COVID-19 cases. While the first confirmed case in Maldives was recorded on 7 March 2020, the first local transmission was confirmed on 15 April 2020. Coronavirus disease (COVID-19) cases spiked since 19 April 2020, with positive cases doubling every 4 days until 2 May 2020. Although the doubling rate has slowed down since then, the cases continue to increase, with 2035 confirmed cases, 1311 recoveries, and eight deaths as of 14 June 2020.2 With the health care capacity considered insufficient to deal with a surge of COVID-19 patients, the government declared a public health emergency on 12 March 2020, initially for 30 days, and currently extended until 29 June 2020. International travel was restricted, and a lockdown was imposed in the greater Malé region, which has been partially eased with effect from 15 June 2020 as part of phase II measures.

Timely and relevant program. The proposed program will help the government mitigate the adverse socioeconomic and health impacts resulting from the COVID-19 pandemic. It will support the government’s COVID-19 countercyclical expenditure program and provide critically needed budget support to help the government undertake public expenditures that are essential to curtail the spread of COVID-19, supporting poor and vulnerable groups, and provide economic support for affected businesses. Table 1 summarizes Maldives’ compliance with the access criteria for the CPRO.

Table 1: Compliance with the Access Criteria for CPRO

CPRO Access Criteria

ADB Staff Assessment

Adverse impact of exogenous shocks

The government estimates that GDP growth in 2020 may fall about 19 percentage points

from the pre-pandemic estimate of 7.5% to –11.3%. Total government revenues will decline

by at least half of the 2020 pre-pandemic estimate. The fiscal deficit in 2020 is estimated to

rise to 13.7% of GDP from the pre-pandemic expectation of 6.2%. ADB estimates that up to

15.6% of the workers could lose their jobs, and the $3.2/day IPL poverty headcount ratio

could increase more than three times from 0.4% in 2018 to 1.3% in 2020. The foreign

exchange reserves may decline to 2.0 months of goods and non-factor services imports from

2.9 months in 2019.

Countercyclical development expenditures

The government’s COVID-19 countercyclical expenditure program of $351 million consists of (i) COVID-19 pandemic response plan targeting the upgrading and provision of health facilities and supplies to support public health ($97 million); (ii) a COVID-19 social protection package for the vulnerable population such as the unemployed, poor and vulnerable households, gender-based violence survivors, and expatriate migrant workers, and subsidies to households on electricity and water bills ($124 million); and (iii) a COVID-19 economic response, providing subsidized working capital to the self-employed and businesses ($130 million).

Pre-shock record of sound

Macroeconomic management was generally sound before the pandemic struck—with strong growth, low inflation, and an improving fiscal position. Annual GDP growth averaged 6.5%

1 ADB. 2020. ADB’s Comprehensive Response to the COVID-19 Pandemic. Manila. 2 Government of Maldives, Ministry of Health. Health Protection Agency COVID-19 Statistics Dashboard (accessed 15

June 2020).

2

CPRO Access Criteria

ADB Staff Assessment

macroeconomic management

and average consumer price index inflation was 0.9% during 2016–2019. Before the pandemic, both ADB and the IMF had projected GDP growth to continue on a strong path, driven by continued strong tourism growth. The government has undertaken major public financial management and tax reforms since 2011. As a result, during 2014–2019, the tax–GDP ratio averaged 19.4% and the total revenue (excluding grants) was 26.4% as a ratio of GDP. The fiscal deficit improved from 10.0% of GDP in 2016 to 5.7% in 2019. The finance sector remains broadly sound. The government is committed to macroeconomic stability and has an ambitious reform agenda centered on sustaining growth.a

Structural reforms

The government took credible and proactive precautionary steps in its COVID-19 response before the first confirmed case in Maldives. As part of its precautionary steps, the government established a COVID-19 Task Force for overall pandemic response planning and monitoring, and a National Emergency Operations Centre to oversee the activities of stakeholder agencies. A COVID-19 Response Trust Fund Committee was set up, with the finance minister as chair, for the oversight, and management of unemployment benefits, subsidies on electricity and water bills to households, and the government’s economic response through subsidized working capital loans. Lockdown measures were implemented, and international borders were closed. Under its COVID-19 pandemic response plan ($97 million), the government will enhance its capacity for COVID-19 tests, quarantine, isolation, and treatment.

Debt sustainability

In 2019, the total PPG debt–GDP ratio was 76.9%. ADB’s DSA expects the PPG debt–GDP ratio to peak at 96.5% in 2020 and eventually fall to 78.8% by 2025 as the government commits to reprioritize and cut capital expenditure in the short term and fiscal consolidation in the medium term. The IMF and ADB assessments concur that debt is sustainable, but Maldives continues to be at high risk of debt distress, with most debt indicators expected to fall within the thresholds before 2030.b ADB’s lending constitutes less than 0.5% of GDP in 2020. Compared with borrowing from international markets, external assistance from ADB, AIIB, the World Bank, OFID, IFAD, and IsDB would reduce the debt–GDP ratio by 1.3–1.6 percentage points during 2020–2025.

Coordination with the IMF

ADB has closely coordinated with the IMF, with regular exchange of information, including joint IMF-World Bank-ADB meetings on 23 March and 14 April 2020. ADB shared updates about the proposed program with the IMF, and the IMF incorporated the program in its assessments. On 22 April 2020, the IMF approved a $28.9 million RCF for Maldives. The IMF assessment is provided through the RCF staff report.

ADB = Asian Development Bank, AIIB = Asian Infrastructure Investment Bank, COVID-19 = coronavirus disease, DSA = debt sustainability assessment, GDP = gross domestic product, IFAD = International Fund for Agricultural Development, IMF = International Monetary Fund, IPL = international poverty line, IsDB = Islamic Development Bank, OFID = OPEC Fund for International Development, PPG = public and publicly guaranteed, RCF = Rapid Credit Facility. a IMF. 2019. Maldives: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive

Director for Maldives. IMF Country Report. No. 19/156. Washington, DC. b IMF. 2020. Maldives: Request for Disbursement under the Rapid Credit Facility—Press Release; Staff Report; and

Statement by the Executive Director for Maldives. IMF Country Report. No. 20/133. Washington, DC. For weak debt-carrying capacity countries, the threshold is 30% for the present value of external debt as a percentage of GDP and 35% for the present value of total public debt–GDP.

Source: Asian Development Bank.

II. PROGRAM AND RATIONALE

A. Background and Development Constraints

1. COVID-19 Crisis and the Health System Constraints

Unprecedented global crisis. On 30 January 2020, the World Health Organization (WHO) declared the COVID-19 outbreak a public health emergency of international concern. On 11 March 2020, WHO characterized the COVID-19 outbreak a pandemic. 3 The COVID-19

3 World Health Organization (WHO). Rolling Updates on Coronavirus Disease (COVID-19) (accessed 12 May 2020).

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infection has spread to 216 countries, areas, or territories, with 7,690,708 confirmed global cases and 427,630 deaths as of 14 June 2020.4 Social distancing, lockdowns, border restrictions, and high levels of uncertainty are resulting in a significant drop in demand for goods and services, upsetting the logistics segment, and disrupting global value chains in supplier countries. The International Monetary Fund (IMF), in its April 2020 projection, estimated global growth in 2020 to fall to –3.0%, a downgrade of 6.3 percentage points from its January 2020 estimate. The decline is more severe for advanced economies, at –6.1%.5

Health system in Maldives. Government health spending in Maldives was 6.5% of gross domestic product (GDP) in 2017—much higher than its South Asian and Southeast Asian peers, which spend 3%–4% of GDP on public health.6 However, the country is deficient in specific health sector capacities needed to contain and manage COVID-19. For instance, in March 2020, it only had 97 ventilators nationwide, which is likely to be inadequate if the virus were to spread further. An estimated 200 critical care beds may be required against the 35 available. Maldives did not have a molecular laboratory capable of testing for and detecting the COVID-19 virus when the first positive case was detected in March 2020.7 Most islands have basic health care facilities but are not equipped to handle COVID-19 cases. Although Maldives has almost 23 doctors per 10,000 people,8 which is only slightly below Luxembourg (29 doctors per 10,000 people) and the Organisation for Economic Co-operation and Development average (32 doctors per 10,000 people),9 almost 44% of health care professionals are in the capital city, Malé.10

Maldives has 1,192 islands (188 inhabited) spread over 90,000 square kilometers (km2), of which 298 km2 island. However, 38% of the country’s population of about 550,000 lives in Malé, which is just about 2 km2 and is among the most densely populated cities in the world.11 The skewed population distribution not only compounds the community transmission risk in Malé but also makes the health service provision in the islands more expensive. The principal means of transport by sea is often influenced by weather conditions and is relatively expensive, making the accessibility, and affordability of health care services a difficult issue for many Maldivians.

2. COVID-19 Impact to the Economy

Dependence on tourism. While the tourism industry in Maldives directly accounts for about 25% of GDP, it stimulates other economic activity in businesses and trade, construction, and transport. The combined contribution of the industry to GDP is about 75%. 12 Tourism revenue—which includes the tourism goods and service tax, green tax, tourism land rent, and lease period extension fee—accounts for about 35% of the total government revenue. If tourism’s indirect effect on other sectors is included, the tourism-dependent revenues comprise about 50% of the total. The COVID-19 related disruption in tourism activities will lead to a decline in GDP growth and cause higher fiscal stress in 2020.

4 WHO. Coronavirus Disease (COVID-19) Pandemic (accessed 15 June 2020). 5 G. Gopinath. 2020. The Great Lockdown: Worst Economic Downturn Since the Great Depression. IMF Blog. 14 April. 6 Government of Maldives, Ministry of Health. 2019. Maldives National Health Accounts, 2015–2017. Malé. 7 The Government of India sent a 14-member rapid response team to help Maldives set up testing laboratories and

train local medical professionals to deal with the COVID-19 pandemic. C. Kumar. 2020. COVID-19: India Readying Rapid Response Teams for Bangladesh, Bhutan, Sri Lanka, and Afghanistan. The Times of India. 22 April; and Z. Zalif. 2020. COVID-19: 6,000 More Test Kits Brought to Maldives. Raajje.mv. 15 March.

8 Government of Maldives, Ministry of Health. 2019. Maldives Health Statistics 2015-16. Malé. 9 Organisation for Economic Co-operation and Development. OECD data. Hospital Beds (accessed 14 May 2020). 10 In 2018, out of 4,922 doctors, nurses, and other related health care staff (69.5% are women), 44% are in Malé.

National Bureau of Statistics. 2019. Statistical Yearbook of Maldives 2019. Health. Malé. 11 National Bureau of Statistics. 2015. Maldives Population and Housing Census 2014—Statistical Release 1:

Population and Households, 2015. Malé. pp. 13, 30, and 31. 12 Government of Maldives, Ministry of Tourism. 2018. Tourism Yearbook 2018. Maldives; and World Bank. TCdata360

database (accessed 17 May 2020).

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The government estimates that tourist arrivals will decline by 50% and GDP will decline by 11.3% compared with 2019 (Table 2). This is the best-case scenario (scenario 1), where the government assumes that tourism will resume by July 2020. In the worst-case scenario, when resumption happens in January 2021, tourist arrivals in 2020 are estimated to decline by 78.0% and GDP by 29.7% compared with 2019 (scenario 3). Unless otherwise specified, scenario 1 has been used for all assessments.

Table 2: COVID-19 Impact on GDP Growth, 2020 Scenario

Expected Border

Reopening Month

Total Tourist Arrivals

2020

Tourist Arrivals in 2020

(after lockdown is lifted)

Tourist Arrival Growth

(%)

GDP Growth

Rate (%)

Nominal

GDP (Rf billion)

Scenario 1 July 2020 845,546 462,868 (50) (11.3) 81.3 Scenario 2 October 2020 625,082 242,404 (63) (17.7) 75.6 Scenario 3 January 2021 382,678a 0 (78) (29.7) 64.5

( ) = negative, COVID-19 = coronavirus disease, GDP = gross domestic product. a Tourist arrivals in 2020 before lockdown. Source: Government of Maldives.

Significant fiscal pressure. The government estimates that its annual revenue in 2020 will drop by half of its pre-COVID-19 budget estimate to $991 million. Even after a 20% reduction in expenditure over 2020 budget estimates (Table 3), the fiscal deficit–GDP ratio will rise to 13.7% in 2020 from 5.7% in 201913 and 6.2% (2020 budget estimate). There is a serious downside risk and the deficit may rise to 22.9% of GDP in the worst-case scenario (scenario 3). The government is severely resource constrained, and the additional financing requirements to meet COVID-19 related expenditures are estimated at $450 million in addition to the budgeted deficit in 2020.

High external vulnerabilities. Merchandize exports, particularly of tuna fish, are expected to drop as all of Maldives’ leading export destinations are suffering from the COVID-19 crisis, but imports are expected to fall more as both tourist arrivals and investments decline sharply. The IMF estimates the current account deficit to decrease from 26.1% of GDP in 2019 to 23.1% of GDP in 2020. With foreign direct investment inflows declining from 15.5% of GDP in 2019 to 6.0% expected in 2020, the overall external balance will fall to –7.2% of GDP from 0.7% in 2019. As a result, gross international reserves coverage, in months of goods, and non-factor services imports, is expected to decline from 2.9 months in 2019 to 2.0 months in 2020.14

Sectoral impact and job losses. According to April 2020 estimates of the Asian Development Bank (ADB), the maximum decline in sectoral GDP is in transport services, hotels, restaurants and related services, and the agriculture sector.15 On the other hand, job losses are expected to be the highest in agriculture, businesses and trade, and construction, and manufacturing. Job losses could reach 11,000–27,000 under ADB’s current smaller shock and larger shock scenarios, translating into an unemployment rate of 6.3% (smaller shock) and 15.6% (larger shock), as a proportion of the employed.16

13 Maldives Monetary Authority (MMA). Monthly Statistics. March 2020. 14 IMF. 2020. Maldives: Request for Disbursement under the Rapid Credit Facility—Press Release; Staff Report; and

Statement by the Executive Director for Maldives. IMF Country Report. No. 20/133. Washington DC (accessible from the list of linked documents in Appendix 2).

15 ADB. 2020. Asian Development Outlook 2020: What Drives Innovation in Asia? Manila. ADB initially projected the GDP of Maldives to contract by 3.0% in 2020. This was updated following the imposition of the lockdown in Maldives and additional travel restrictions in several economies in late March 2020. The revised 2020 forecast also considered ADB’s updated COVID-19 impact assessment.

16 The smaller shock scenario corresponds to ‘shorter containment, smaller demand shocks’ In ADB’s economic impact assessment of COVID-19, while the larger shock scenario means ‘longer containment, larger demand shocks with additional impact if significant outbreak occurs’. According to the population and housing census 2014, the labor

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Vulnerable groups. Women in Maldives suffer from a low labor force participation rate of 42% compared with 75% for men. Women will be more affected in the current pandemic because about 40% of them (compared with about 30% of men) are in the informal sector with no job security.17 According to a survey by the UN Women’s Regional Office for Asia and the Pacific in April 2020, 26% of women engaged in informal work said they have lost their jobs.18 A large proportion of women work in manufacturing industries, the civil service, and education. Out of the total employers or owners, only 18% are women.19 In the health sector, 90% of nurses are women who are vulnerable to the risk of COVID-19 as frontline workers.20 Women are also vulnerable to increased gender-based violence (GBV), which has been found to increase during every type of emergency—whether economic crisis, conflict, or disease outbreak. 21 Thirty four cases of violence against women were formally submitted to the Ministry of Gender, Family, and Social Services (MGFSS) during May 2020.22

Expatriate migrant workers are estimated to constitute about 25% of the total workforce and about 88% of the workforce in construction and more than 50% in the tourism and hotel industry, the sectors hit by the pandemic.23 Most have lost their jobs and are compelled to live in congested shared quarters that may not allow strict social distancing. Out of the reported positive COVID-19 cases, two-thirds are non-Maldivians, and more than half are from Bangladesh (footnote 2). They are reportedly being stigmatized, and are, therefore, reluctant to disclose their health condition. While the government has taken steps to support the migrants, including opening a dedicated clinic on Hulhumalé island, near the capital, Malé, migrant workers are hesitant to visit the clinic. There is a need to ensure safer living conditions for them.24

Maldives has made significant improvements in poverty reduction, with the percentage of people below the $5.5/day international poverty line (IPL) falling from 11.2% of the population in 2015 to 5.6% in 2018. The percentage of people below the $3.2/day IPL also fell to 0.4% in 2018 from 1.3% in 2015. However, the effects of COVID-19 will temporarily reverse this trend. With an assumed reduction in per capita consumption expenditure of 20%, ADB estimates that the $3.2/day IPL poverty headcount ratio will increase more than three times from 0.4% in 2018 to 1.3% in 2020. The $5.5/day IPL poverty headcount ratio will almost double from 5.6% in 2018 to 10.5% in 2020.

3. Government’s COVID-19 Response

Government’s recovery plan. The economic recovery hinges on the speed at which the tourism industry can revive operations. The government has initiated preparations for gradual

force participation rate for the population aged 15 and above was 63.8%, out of which 5.2% were unemployed. National Bureau of Statistics. 2014. Maldives: Population and Housing Census 2014: Statistical Release IV—Employment. Malé.

17 Summary Poverty Reduction and Social Strategy (accessible from the list of linked documents in Appendix 2). 18 UN Women. 2020. Surveys show that COVID-19 has Gendered Effects in Asia and the Pacific. 29 April (accessed

19 May 2020). 19 Staff estimates based on the 2016 household income and expenditure survey. National Bureau of Statistics and

Government of Maldives, Ministry of Finance and Treasury. 2016. Statistical Release III: Employment. Malé. p. 23. 20 Government of Maldives, Ministry of Health. 2016. Maldives Health Profile. Malé. p. 22. 21 United Nations Development Programme. 2020. UNDP Brief: Gender Based Violence and COVID-19. New York. 22 Reports of GBV have increased dramatically from 19 cases in 2013 to 383 cases in 2018 (347 females and 36 males)

and 433 cases in 2019 (378 females and 55 males). While the reported number of cases in May 2020 is slightly higher than the average in other months, it could be an underestimation considering the enforced lockdown in Malé and the difficulties for GBV victims to physically register the cases.

23 International Organization for Migration. 2018. Migration in Maldives: A Country Profile 2018. Malé. At the time of the 2014 census, women constituted only 12% of foreign nationals. According to the census, practically all (99%) Bangladeshi migrants were men, followed by Sri Lankans (86%) and Indians (73%). Among migrant women, 45% were from India, 12% from Sri Lanka, 6% from Bangladesh, and 37% from other countries. National Bureau of Statistics. Census 2014. Statistical Release II: Migration, Table MG14.

24 Even migrants without work permits are allowed to access services from the COVID-19 clinic.

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opening from July 2020. The Maldives tourism market consists largely of high net worth individuals who may be able to resume their plans to travel to the resorts in Maldives once flights become available.25 The Ministry of Tourism is considering opening specific airports for tourists. It has prepared a draft paper on Safe Tourism Guidelines and shared it with stakeholders for comments.26 The ministry is also collaborating with marketing agencies, industry associations, and employee associations for tourism recovery planning.27

Government’s countercyclical expenditure program. The government has initiated a $351 million comprehensive COVID-19 response package to counter the negative health, social, and economic effects of the COVID-19 pandemic. The response package is summarized below and the scheme details are in the linked documents.28

(i) COVID-19 pandemic response plan ($97 million). To prevent the spread of COVID-19 and minimize the deaths caused by it, the government is enhancing its capacity for tests, quarantine, isolation, and treatment. It has established two molecular laboratories in Malé with a daily testing capacity of up to 400 tests per day, and it intends to increase the capacity to at least 800 per day.29 By 30 May 2020, Maldives had conducted 21,979 tests.30 Three isolation facilities and 1,650 quarantine rooms have been set up to help manage a surge in the number of patients.31 It has established dedicated clinics for COVID-19, where consultation is provided free of charge. The COVID-19 guidelines and standard operating procedures (SOPs) were prepared in February 2020 and later revised.32

The government will enhance its capacity for COVID-19 tests, quarantine, isolation, and treatment by (a) providing protective equipment, particularly to frontline health workers who are testing for the presence of the virus, managing isolation services, and treating COVID-19 cases ($72.1 million); (b) providing at least 400 isolation beds in separate wards for men and women ($14.6 million); (c) establishing and operating the National Emergency Operations Centre to coordinate and monitor the government’s COVID-19 response ($3.4 million); (d) expanding a health facility in Hulhumalé into an operational 300-bed COVID-19 treatment facility with at least 200 critical care beds ($3.6 million); (e) upgrading five regional hospitals to operate testing and treatment services ($2.8 million); and (f) operationalizing 26 incident command posts and symptom detection infrastructures at important gateways of the country ($0.9 million). With these measures, the government targets effectively controlling the pandemic and reducing the infection doubling rate to at least 30 days from the 10-day doubling rate as of 22 May 2020.

(ii) COVID-19 social protection package ($124 million). This package aims to support segments that have been rendered vulnerable because of the pandemic. It includes (a) the COVID-19 Income Support Allowance Program, which provides

25 The key tourism markets of Maldives are Europe (about 50% in 2019) and the People’s Republic of China (17% in

2019), which are seeing a relaxation of restrictions. 26 Maldives- Safe Tourism Guidelines (available from the list of linked documents in Appendix 2). 27 These agencies include the Maldives Marketing and Public Relations Corporation, the Guesthouse Association of

Maldives, the Tourism Employees Association of Maldives, and the Maldives Association of Tourism Industry. 28 Government Schemes Covered in the COVID-19 Social Protection and Economic Assistance Package (accessible

from the list of linked documents in Appendix 2). 29 The laboratories are the Indira Gandhi Memorial Hospital laboratory and the Maldives Police Service laboratory. 30 Worldometer. Reported Coronavirus Cases (accessed 17 May 2020). 31 Quarantine facilities are at Villifaru, Royal Island Resort, Fun Island Resort, and Eriyadhoo. Isolation facilities are at

Farukolhu, Velidhoo, and Hulhulé. 32 The guidelines and SOPs emphasize step by step actions that need to be taken at each stage of the COVID-19

pandemic. Government of Maldives, Health Protection Agency. 2020. COVID-19 Quick Reference Guidelines Version 8. Malé. 17 March.

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cash assistance for 3 months to salaried employees and self-employed workers whose income has been affected by job or work loss, forced leave without pay, or salary deductions33 ($19.5 million); (b) subsidies to at least 45,000 households for their electricity (40% subsidy) and water bills (30% subsidy) over 2 months to provide relief during the crisis period ($19.8 million); (c) cash assistance to at least 4,000 vulnerable households registered with the National Social Protection Agency ($6.1 million); (d) providing safe shelters and food assistance for at least 15,000 expatriate migrant workers who are severely affected by the crisis. The installation of the mostly pre-fabricated and temporary housing units may trigger standard construction-related environmental impacts and risks and therefore the program is categorized B for environmental safeguards ($6.0 million); 34 (e) providing health coverage to all COVID-19 patients (national and expatriates) under the health financing scheme (Aasandha) including outpatient and inpatient care ($65.0 million); (f) providing a staple food buffer stock for food security and managing price volatility ($5.5 million); (g) operationalizing five accommodation blocks in the family and child service centers in Malé and outer atolls to house about 100 survivors of GBV to provide them safety and security ($0.9 million); and (h) assistance to Maldivians stranded abroad, including financial assistance, consular assistance, health care support, and evacuation ($1.5 million).

(iii) COVID-19 economic response ($130 million). This includes support for the self-employed and small businesses, manufacturers, traders, tour operators, guest houses, and resorts. The government has launched (a) the Viyafaari Ehee working capital loan scheme with a maximum loan amount of Rf18,000 ($1,168) for the self-employed and Rf500,000 ($32,467) for small businesses with an annual turnover of less than Rf10 million in 2019 ($26.0 million); and (b) the COVID-19 Recovery Scheme to provide working capital loans with a maximum amount of Rf7.7 million ($500,000) for businesses with an annual turnover of more than Rf10 million in 2019 ($103.9 million). Applicants will be provided with subsidized and collateral-free working capital loans at 6% interest per annum (compared with the market lending rate of about 12% during January–February 2020), with a 6-month grace period and up to 3-year repayment period. No interest will be charged during the grace period. The schemes are subject to the condition that such businesses will not lay off or force local employees to go on unpaid leave.

Finance sector risks and monetary response. The impact of COVID-19 on Maldives’ capital markets will be low, as the markets are nascent.35 Banks make up the dominant segment in the finance sector, with credit to the private sector from banks at Rf24.5 billion (28% of GDP) in 2019.36 However, about 70% of banks’ lending is to the tourism industry, which is under stress. Weak asset quality in the banking industry before COVID-19 at the end of 2019 (9.4% of total loans) will be exacerbated. This will be mitigated to an extent by the scheme for subsidized working capital under the COVID-19 response package and the introduction of a 6-month moratorium on loan repayments for affected businesses. The reduction of banks’ minimum reserve requirement from 10% to 5% by the Maldives Monetary Authority (MMA) will provide additional liquidity. Despite this release, liquidity pressure is expected as moratoriums take effect and banks are unlikely to receive new deposits. The MMA’s ability to maintain the exchange rate

33 An allowance of Rf5,000 per month is provided for complete loss of income, and compensation in other cases tops

up income up to Rf5,000. 34 Three locations have been identified—at Hulhumalé, Gulhifalhu, and Vilivaru for this purpose. About 700 migrant

workers have already been transferred to a quarantine facility in Gulhifalhu. 35 The market capitalization of the stock exchange is 17.8% of GDP as on 19 May 2020. Maldives Monetary Authority

(MMA). Real Sector Statistics; and Maldives Stock Exchange (accessed 19 May 2020). 36 MMA. Banking Sector.

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peg (through a $150 million swap facility with the Reserve Bank of India) and the decline in imports related to tourism amid a steep reduction in export income will help manage external balances. However, pressure on repatriation of profits by foreign banks cannot be ruled out.

4. Macroeconomic Management and Debt Sustainability

Sound macroeconomic management. Maldives has consistently maintained high economic growth, averaging 7.2% annually during 1980–2015, primarily backed by development in tourism, fishing, and construction.37 More recently, during 2016–2019, annual GDP growth averaged 6.5% and consumer price inflation remained low at 0.9% (footnote 13). Before the pandemic, both ADB and the IMF had projected GDP growth to accelerate in 2020 and continue on a strong path in the medium term. During 2014–2019, the tax–GDP ratio averaged 19.4% and the total revenue (excluding grants) was 26.4% as a ratio of GDP. A further increase in tax revenues was projected in 2020 before the pandemic, with the introduction of personal income tax and amendments to the airport service charge and development fee. The fiscal deficit shrank to 5.7% of GDP in 2019 from 10.0% in 2010, but the current account deficit remained high at 26.1% of GDP in 2019.

Since 2011, Maldives has undertaken substantial, and fast-track reforms to widen its tax base, with assistance from ADB. These reforms include (i) introducing new taxes (goods and services tax, a green tax, a business profit tax, and personal income tax); (ii) establishing a revenue authority; and (iii) system modernization (footnote 37). Some public financial management (PFM) reforms have been undertaken for improved planning, budgeting, monitoring, accounting, and transparency (para. 35). The government is taking welcome steps to improve governance, transparency, and resilience to climate change. It is committed to macroeconomic stability and has an ambitious reform agenda for sustaining growth.38

On the monetary side, the MMA has maintained an accommodative stance in recent years as credit grew faster than nominal GDP growth while the overall inflationary pressures remained low. The local currency is pegged to the United States dollar. The foreign exchange rationing to banks sometimes triggers a foreign exchange shortage that has led to an active parallel market. The MMA is also working with the IMF to improve its policy transmission through gradual de-dollarization and the adoption of a more appropriate exchange rate regime.

Debt sustainability. In its April 2020 debt sustainability assessment (DSA), after considering the effect of COVID-19 and including the proposed program,39 the IMF assessed Maldives’ public debt as sustainable but at a high risk of debt distress. Debt sustainability is subject to rapid recovery in growth and the committed actions by the authority to reprioritize and cut capital expenditure, medium term fiscal consolidation, 40 and active debt management (footnote 14). ADB’s DSA uses more conservative assumptions than the IMF, based on the most recent government estimates of a bigger economic contraction and higher primary deficits.41

Under the baseline scenario, public debt is expected to rise from 76.9% in 2019 to 96.5% in 2020

37 ADB. 2017. Fast-Track Tax Reform: Lessons from Maldives. Manila. 38 IMF. 2019. Maldives: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive

Director for Maldives. IMF Country Report. No. 19/156. Washington, DC. 39 ADB program’s loan amount considered by the IMF in its assessment was a $27.8 million loan, based on the financing

proposed earlier by ADB. This almost matches the $25 million revised loan amount considered now. IMF assessment did not include the grant of $25 million in this proposed program.

40 See para.18 on the recent reforms undertaken. The 2013 Fiscal Responsibility Act sets out some quantitative fiscal targets and procedural rules to achieve fiscal stability and sustainability, improve the fiscal transparency, and increase the accountability of the government.

41 ADB’s assessment assumes a lower GDP growth rate (-11.3% real, -8.0% nominal) as compared to IMF’s (-8.1% real, -5.9% nominal) and lower primary balance (-11.1% of GDP) as compared to -10.1% of GDP assumed by IMF. Debt Sustainability Assessment (accessible from the list of linked documents in Appendix 2).

9

before declining to 88.8% in 2021 and 78.8% by 2025. Stress tests show that debt ratios will be elevated but display medium term downward trends. While the debt path is slightly higher than in the IMF assessment, ADB’s assessment yields the same conclusion as the IMF’s—that public debt is sustainable but at high risk of debt distress, with most debt indicators expected to fall within the thresholds before 2030. ADB loan constitutes less than 0.5% of GDP and does not jeopardize the country’s debt sustainability. On the contrary, compared with borrowing from international markets, concessional financial assistance from ADB, the World Bank, OPEC Fund for International Development, the International Fund for Agricultural Development, and the Islamic Development Bank would reduce the debt–GDP ratio by 1.3–1.6 percentage points in the projection period until 2025. External public and publicly guaranteed debt will also rise but is sustainable in the medium term. Rollover risks from the repayment of two outstanding international sovereign bonds of $350 million are mitigated by the accumulation of liquid assets in the Sovereign Development Fund. The risk of high external debt distress is further mitigated by an effort to obtain concessional loans and grants to the extent possible. The government is reviewing the debts from bilateral partners to benefit from the G-20 debt service suspension initiative.42 The government is currently not considering negotiating with multilateral financial institutions for debt suspension since those loans are mostly concessional.

B. Proposed Program and ADB’s Value Addition

The CARES Program will provide budget support to the government for implementing its countercyclical expenditure program for mitigating the adverse social and economic impact of the COVID-19 pandemic. Specifically, the program will support the government in improving the resilience of its health systems against infectious diseases, and implementing social and economic measures for the vulnerable population and affected businesses (para.16). The proposed program builds on ADB’s strong partnership with Maldives. ADB initiated dialogue with the government and other development partners for a coordinated response to the pandemic before the first case was reported in Maldives. It conducted multiple consultations with stakeholders to strengthen the gender and socioeconomic aspects of the government program.

ADB’s comprehensive package of support to Maldives for COVID-19 related health measures includes (i) a $500,000 grant from the Asia Pacific Disaster Response Fund, approved on 26 March 2020; and (ii) the allocation of a $798,000 grant from the TA on Regional Support to Address the Outbreak of Coronavirus Disease 2019 and Potential Outbreaks of Other Communicable Diseases43 to procure medical supplies and personal protective equipment.

The program is aligned with ADB’s Strategy 2030, including operational priorities on addressing remaining poverty and reducing inequalities (para. 37), accelerating progress in gender equality (para. 38), strengthening governance and institutional capacity (para. 35), and fostering regional cooperation and integration (para. 26).44 The program is also aligned with the government’s national strategy, the Strategic Action Plan (SAP), 2019–2023; priorities on the enhancement of community resilience under the pillar of Jazeera Dhiriulhun (quality of island life), and improvement of independent institutions and public service under the pillar of good governance.45

The proposed program is aligned with the preparation of Maldives’ country partnership

42 The People’s Republic of China announced on 8 June 2020 that it had suspended debt repayments for 77 developing

countries as part of the G-20 debt relief initiative (https://www.fmprc.gov.cn/mfa_eng/wjbxw/t1787197.shtml). Unconfirmed reports indicate that Maldives is included.

43 ADB. 2020. Technical Assistance on Regional Support to Address the Outbreak of Coronavirus Disease 2019 and Potential Outbreaks of Other Communicable Diseases (TA 9950). Manila.

44 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila.

45 Government of Maldives. 2019. Strategic Action Plan, 2019–2023. Malé.

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strategy, 2020–2024, which envisages stronger ADB engagement in the social sector, public sector management, and an improved business environment. ADB is in discussions with the government to promote private sector development through potential nonsovereign lending in areas such as agriculture and fisheries for economic diversification, and micro, small, and medium-sized enterprises (MSMEs) for economic resilience and recovery; and sovereign lending for trade facilitation.46 In the medium term, ADB plans to assist the country in strengthening its health care capacity through a social sector development project and by growing stronger subregional cooperation in dealing with infectious diseases under a regional TA.47

The South Asian Association for Regional Cooperation (SAARC) COVID-19 Emergency Fund has been utilized to deliver medical supplies and machines to the SAARC member countries.48 The SAARC Development Fund is also preparing a $1.5 million grant for Maldives’ COVID-19 response. ADB will provide support under the South Asia Subregional Economic Cooperation Program to (i) make the subregional economy more resilient to the pandemic by enhancing the subregional supply chain through transport and trade facilitation, and (ii) sharing international good practices with the customs administrations of member countries to facilitate the entry of critical imports of COVID-19 related medical supplies and equipment.49 ADB will also support the mutual learning of South Asia Subregional Economic Cooperation countries on COVID-19 response and recovery, including international travel restoration, through the TA on Supporting Knowledge Solutions for New Development Strategies in South Asia.50

Coordination with the International Monetary Fund and other development partners. ADB has held several consultations with the World Bank, the IMF, the Asian Infrastructure Investment Bank, the Islamic Development Bank, and United Nations agencies on possible coordination for the emergency support to Maldives. ADB shared updates about the proposed program with the IMF during consultations, and it incorporated the proposed program in its assessments (footnote 14). On 22 April 2020, the IMF approved a $28.9 million Rapid Credit Facility for Maldives (footnote 14).

ADB held discussions with United Nations agencies such as the United Nations Children’s Fund, the United Nations Development Programme, and the International Organization for Migration to understand how their programs are aligned with the government’s COVID-19 response, particularly for assistance to the poor, vulnerable, and migrants. The World Bank processed a $7.3 million COVID-19 Emergency Response and Health Systems Preparedness Project to help the country prevent, detect, and respond to the COVID-19 pandemic and strengthen its public health preparedness. On June 9, 2020, it also approved a $12.8 million COVID-19 Emergency Income Support Project to mitigate the economic impact of the crisis on

46 ADB has been supporting local community-based activities in the outer atolls through grants and TA in areas such

as the restoration of livelihoods after the tsunami, mobilization of women’s development committees for community outreach and awareness-raising on energy efficiency, and promotion of women and youth entrepreneurship in the local community. The key learning from these interventions is that the following are required for success (i) commitment and support from the local council, (ii) understanding of traditional culture and customs, supplemented by guidelines and manual for implementing staff, since the communities are dispersed and maintain a conservative culture, and (iii) regular follow-up by the international and local project staff.

47 ADB. 2020. Technical Assistance to Support to Address Outbreak of COVID-19 and Strengthen Preparedness for Communicable Diseases in South Asia (TA 9982-REG). Manila.

48 World Bank Blogs. 2020. South Asia shows new spirit collaboration to fight COVID-19 (coronavirus) pandemic. Maldives has pledged $100,000 to the SAARC COVID-19 Emergency Fund. Potential areas identified for regional collaboration include closer collaboration between the national health emergency agencies, and creation of a central repository to disseminate information. SAARC’s Disaster Management Centre, which is housed at the Gujarat Institute of Disaster Management in India, has set up a COVID-19 website with daily updates about confirmed cases throughout South Asia and actions that each country is taking.

49 Ongoing and Planned Regional Cooperation Initiatives (accessible from the list of linked documents in Appendix 2). 50 ADB. 2018. Technical Assistance on Supporting Knowledge Solutions for New Development Strategies in South Asia

(TA 9586). Manila.

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workers and their families. Their support is complementary to ADB’s support, which focuses on the poor, women, and other vulnerable groups. WHO, the technical lead partner for the public health policy response in Maldives, is helping the government prepare a comprehensive plan covering both the health care and economic crisis.51 OPEC Fund for International Development is planning to provide budget support to finance the economic assistance package. The Asian Infrastructure Investment Bank is considering cofinancing the World Bank’s COVID-19 Emergency Response and Health Systems Preparedness Project. ADB is also considering cofinancing from other development partners. The Islamic Development Bank is planning to support trade facilitation while the International Fund for Agricultural Development intends to support agriculture modernization for economic recovery planning.

C. Impacts of the Program

The ADB CARES Program will contribute directly to the immediate priorities in government’s response to the pandemic—the need to improve access to health facilities and care, protect the vulnerable sections, and support sustainability of affected businesses. The impact of the proposed program will be social inclusion promoted and economic resilience improved (footnote 45). The effect of the reform will be the adverse socioeconomic effect of COVID-19 on poor and vulnerable groups mitigated. This will be achieved through the following outputs: (i) COVID-19 health response measures implemented to strengthen the health system delivery, (ii) social protection measures implemented to mitigate the negative impacts of COVID-19 on the poor and vulnerable groups, (iii) economic assistance measures implemented to support business continuity and sustainability, and (iv) COVID-19 response governance mechanisms strengthened to ensure transparent monitoring and reporting of actions taken under the government’s comprehensive COVID-19 response package. Specific output targets are shown in the Design and Monitoring Framework (Appendix 1).

D. Development Financing Needs and Budget Support

The government has requested (i) a concessional loan of $25,000,000 from ADB’s ordinary capital resources, and (ii) a grant not exceeding $25,000,000 from ADB’s Special Funds resources (Asian Development Fund) to help finance the program.52 The loan will have a 24-year term, including a grace period of 8 years; an interest rate of 1.0% per year during the grace period and 1.5% per year thereafter; and such other terms and conditions set forth in the draft loan agreement.

Table 3: Urgent Financing Needs and Support for 2020 ($ million)

Financing Requirement and Source

FY2020 Budget Estimate

(before COVID-19)

FY2020 (adjusted

for COVID-19) A. Total revenues and grants 1,943.0 990.9 B. Total expenditure 2,335.7 1,833.1 Financing Requirement (B−A) 392.5 842.2 Additional financing requirement (post-COVID-19) 449.7 Of which:

External financing (under consideration)a 208.5 World Bank 50.1 ADB CARES Program 50.0

51 On the nonsovereign side, the International Finance Corporation and the European Investment Bank are considering

assistance to the Bank of Maldives for supporting the government’s working capital scheme for the private sector. 52 The $25 million Asian Development Fund grant comprises (i) $5 million from the Vice President’s Savings and

Cancellations for the 2020 program, (ii) $10 million from the Disaster Response Facility, and (iii) $10 million from the Strategy, Policy and Partnerships Department corporate pool. The $25 million concessional ordinary capital resources lending is from the Disaster Response Facility.

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Financing Requirement and Source

FY2020 Budget Estimate

(before COVID-19)

FY2020 (adjusted

for COVID-19) International Monetary Fund Rapid Credit Facility 28.9 OPEC Fund for International Development 20.0 International Fund for Agricultural Development 4.5 Islamic Development Bank 46.2 Asian Infrastructure Investment Bank 7.3 SAARC Development Fund (grant) 1.5 Balance (unidentified- includes domestic + external) 241.2

ADB = Asian Development Bank, CARES = COVID-19 Active Response and Expenditure Support, COVID-19 = coronavirus disease, OPEC = Organization of Petroleum Exporting Countries, SAARC = South Asia Association for Regional Cooperation. a World Bank assistance for $17.3 million has been approved. The balance is under consideration. The International Monetary Fund’s Rapid Credit Facility for $28.9 million was approved on 22 April 2020.

Source: Asian Development Bank calculations based on information obtained from the government.

As a result of the adverse impact of COVID-19, the government’s financing needs are projected to increase by $449.7 million in 2020, out of which $208.5 million external financing from development partners is approved or under consideration (Table 3). For the remaining financing gap of $241.2 million, the government is considering a combination of the following options: (i) further expenditure cuts to reduce the funding shortfall, (ii) assistance from other development partners, (iii) domestic borrowings, and (iv) sovereign bond issuances in international markets.

E. Implementation Arrangements

The Ministry of Finance (MOF) will be the executing agency for the program. The implementing agencies are the Ministry of Health, the MGFSS, and the Ministry of Economic Development. The COVID-19 Trust Fund Committee (Table 1) will approve all expenses and provide an oversight function for its relief and recovery package.53 The Fiscal Affairs Department of the MOF will function as the secretariat to the committee; and will coordinate with the Ministry of Health, the MGFSS, and the Ministry of Economic Development for the implementation of the program. For transparency in expenditure related to the government’s COVID-19 response, the MOF is posting regular online updates of the budget utilization.54 The MOF will also provide quarterly reports to ADB on the progress achieved and the expenditures incurred from the government’s budget to support the measures under its countercyclical expenditure program. The program implementation period is from March 2020 to June 2021 including the prior actions initiated since March 2020. The proceeds of the loan will be withdrawn as a single tranche immediately after loan effectiveness, and in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time).

III. ATTACHED TECHNICAL ASSISTANCE

Attached TA will support the government in effective monitoring and evaluation, and targeting of the government’s COVID-19 response package, and identify areas for further PFM reforms that can be supported by ADB under a subsequent program.55 The transaction TA is estimated to cost $500,000, which will be financed on a grant basis by ADB’s Technical Assistance Special Fund (TASF-6).56 The government will provide counterpart support in the form of staff, office, administrative and logistics support, translation, and other in-kind contributions.

53 List of Ineligible Items (accessible from the list of linked documents in Appendix 2). 54 Government of Maldives, Ministry of Finance. Weekly COVID-19 Spending. 55 Attached Technical Assistance Report (accessible from the list of linked documents in Appendix 2). 56 In addition, another regional TA will promote knowledge exchange and dialogues on COVID-19 economic impacts

and response measures, including good practice of restoring international tourism (footnote 50).

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The implementation arrangements for the TA are aligned with those of the program.

The TA’s outcome is the government's health response and socioeconomic package delivered to the poor, women, migrant workers, the elderly, and differently abled, and other vulnerable groups, and businesses, which will be achieved through the following TA outputs: (i) a monitoring system established with sex-, age-, and disability-disaggregated data for better tracking and monitoring of benefits accrued from the government's COVID-19 response to the poor, women, migrant workers, the elderly, and differently abled persons; (ii) the capacity of implementing agencies to deliver the COVID-19 response package and to implement safeguards strengthened; and (iii) mid- to long-term road maps to improve the public service delivery and monitoring mechanism drafted. Consultants will be recruited in accordance with ADB Procurement Policy (2017, as amended from time to time) and its associated staff instructions. TA funds will be disbursed in accordance with the Technical Assistance Disbursement Handbook (2010, as amended from time to time).

IV. DUE DILIGENCE

Governance. ADB’s interim country partnership strategy 201657 noted that while Maldives’ PFM systems have shown signs of improvement, government inefficiency, and weak institutional capacity remain critical constraints. PFM system weaknesses include poor budget credibility and execution stemming from poor planning, weak project appraisal and selection, and the absence of capital budget ceilings. These weaknesses result in frequent cost overruns and delays in implementation.58 The government’s PFM reform action plan was updated in January 2018 with World Bank support and has formulated three broad PFM reform goals: (i) strengthening fiscal discipline; (ii) ensuring debt sustainability; and (iii) efficient, transparent, and modern management of public finances. The World Bank PFM Strengthening Project for Maldives aims to strengthen these areas.59 Some improvements to the PFM systems are: (i) a fiscal strategy statement is produced annually; (ii) medium term capital spending projections are provided; (iii) an integrated financial management information system has been implemented; and (iv) appropriation rules have been introduced with effect from the 2020 budget to enhance credibility.

The prevalence of corruption in the public sector is perceived as high, based on global corruption indicators.60 Reform projects are under way to improve procurement, oversight, and audit.61 The MOF prepares and publishes on its website consolidated weekly and monthly fiscal development reports, monthly cash flow reports, and quarterly economic, and fiscal development reports. The MOF’s state internal audit committee is committed to increase the accountability and transparency of COVID-19 related expenses by conducting a special audit. 62 The program expenditure will be subject to external audit by the Auditor General’s Office. ADB’s Anticorruption Policy (1998, as amended) was explained to and discussed with the government.

Poverty and inequality. Maldives has made significant improvements in poverty

57 ADB. 2016. Maldives: Interim Country Partnership Strategy. Manila. 58 IMF. 2017. Maldives: Technical Assistance Report—Public Investment Management Assessment. IMF Country

Report. No. 19/102. Malé. 59 Government of Maldives, Ministry of Finance. 2014. Public Finance Management Reform. 60 Transparency International. 2019. Corruption Perceptions Index. Maldives ranks 130 out of 183 countries. ADB has

rated the overall procurement risk at country level as high (2017). 61 Recent procurement reforms include (i) separating the regulatory and operational functions of the National Tender

Board, (ii) establishing an audit and complaints board within the MOF, (iii) establishing internal audit units in all line ministries, and (iv) establishing the electronic government procurement (e-GP) portal.

62 PSM News. 2020. Majority of COVID-19 related expenses undertaken through STO: Finance Minister. 16 May. The audit will cover the Ministry of Health, the Ministry of Defense, the Department of Immigration, the National Disaster Management Authority, the Ministry of National Planning and Infrastructure, the MGFSS, and the State Trading Organization. About 72% of the items needed for COVID-19 operations are through the State Trading Organization.

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reduction (para. 14). In terms of expenditure inequality, as measured by the Gini coefficient, Maldives’ Gini coefficient of 31.3 is mostly in line with other countries in the region.63 However, the $5.50/day IPL poverty headcount ratio could almost double from 5.6% in 2018 to 10.5% in 2020. Moreover, people in the outer atolls may be more affected because poverty is unequally distributed across Maldives, with higher poverty rates in the outer atolls.64 The government’s COVID-19 response package will help mitigate COVID-19’s impact through timely and effective health and social assistance measures that shield the poor and vulnerable population—especially vulnerable women, the elderly, and differently abled persons—against price and income shocks.

Gender. The program is categorized effective gender mainstreaming. The government’s COVID-19 response package will expand the social assistance programs for poor and vulnerable groups as follows: (i) 1,500 vulnerable households registered with the National Social Protection Agency and headed by single, widowed, divorced, or differently abled women will be reached through the cash assistance program during the pandemic emergency period; (ii) 15,000 migrant workers will be transferred to safer accommodation consisting primarily of prefabricated housing units in greater Malé, with separate accommodation for women; (iii) women and differently abled applicants will receive priority benefits from the unemployment allowance within a reduced 2-week approval time; (iv) women-led enterprises (18% of all applications) will benefit from the government’s provision of working capital for MSMEs, with disbursement within a reduced 2-week approval time; (v) isolation beds will be provided in five regions, with separate wards for men and women; (vi) at least five accommodation blocks will be made operational for survivors of GBV in Malé and the outer atolls (to provide temporary protection and support for women escaping GBV); and (vii) additional benefits will accrue to households from the government’s electricity and water subsidies. A gender specialist will be located at the MGFSS to liaise with the MOF to ensure effective monitoring of the gender-related targets in the program.

Safeguards. In compliance with ADB’s Safeguard Policy Statement (2009), the program is classified category B for environment, C for involuntary resettlement, and C for indigenous people’s safeguards. An assessment of the potential environmental and social impacts and risks associated with the government’s COVID-19 countercyclical expenditure program has been undertaken as described in the safeguards assessment matrix. 65 There are no anticipated impacts related to involuntary resettlement and indigenous peoples. There are no anticipated significant impacts on environment, but the installation of the mostly prefabricated housing units intended as temporary shelter for migrant workers may trigger standard construction related environmental impacts and risks. These units will be set up on vacant government land with existing water, sewage, and electricity connections; and solid waste treatment arrangements. Standard construction related environmental impacts and risks will be addressed following the Maldives Environmental Protection Regulations, 2012, and through the requirements, and mitigation measures agreed with the government, as set out in the Safeguard Assessment Matrix. The attached TA will support the government in ensuring compliance with these requirements and mitigation measures. It will also support external monitoring and verification of government monitoring of the environmental management and mitigation measures (footnote 55).

Major risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.66

63 World Bank. World Development Indicators (accessed 31 December 2019). Sri Lanka is higher at 39.2 (2012),

Bangladesh at 32.1 (2010), and Nepal at 32.8 (2010). 64 Against national average consumption levels of Rf5,634 per month, the mean consumption is about Rf7,400 per

month in Malé but is substantially lower in the atolls, at about Rf4,400 per month, based on the 2016 household income and expenditure survey poverty report. Summary Poverty Reduction and Social Strategy (accessible from the list of linked documents in Appendix 2).

65 Safeguard Assessment Matrix (accessible from the list of linked documents in Appendix 2). 66 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

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Table 4: Summary of Risks and Mitigating Measures

Risks Mitigation Measures Exponential rise in COVID-19 cases or prolonged COVID-19 pandemic renders the proposed fiscal stimulus less effective.

ADB engages continually with the government and other development partners to devise an effective and appropriate response, including additional support.

Prolonged pandemic worsens the fiscal deficit with a risk to debt sustainability.

The government performs further expenditure cuts to control the deficit. It is also considering the issuance of more Treasury bills and Treasury bonds in the domestic market and the issuance of external sovereign bonds in international markets to obtain more capital. ADB engages continually with the government, the IMF, and other development partners to devise an effective and appropriate response, including additional support.

Weaknesses in public governance systems and coordination issues among multiple implementing agencies constrain the implementation of the government’s COVID-19 response.

The finance minister-led COVID-19 Trust Fund Committee and the Fiscal Affairs Department of the MOF will coordinate with the implementing agencies for program implementation. The MOF’s state internal audit committee will increase the accountability and transparency of COVID-19 related expenses by conducting a special audit. The program expenditure will be subject to external audit by the Auditor General’s Office. ADB TA will support (i) capacity development of the implementing agencies, (ii) the monitoring and evaluation system, and (iii) enhancement of public financial management systems across implementing agencies.

ADB = Asian Development Bank, COVID-19 = coronavirus disease, IMF = International Monetary Fund, MOF = Ministry of Finance, TA = technical assistance. Source: Asian Development Bank.

V. ASSURANCES

The government has assured ADB that implementation of the program shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, financial management, and disbursement as described in detail in the loan and grant agreements.

VI. RECOMMENDATION

I am satisfied that the proposed loan and grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan of $25,000,000 to the Republic of Maldives for the COVID-19 Active Response and Expenditure Support Program, from ADB’s ordinary capital resources, in concessional terms, with an interest charge at the rate of 1.0% per year during the grace period and 1.5% per year thereafter; for a term of 24 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board; and

(ii) the grant not exceeding $25,000,000 to the Republic of Maldives from ADB’s Special Funds resources (Asian Development Fund) for the COVID-19 Active Response and Expenditure Support Program, on terms and conditions that are substantially in accordance with those set forth in the draft grant agreement presented to the Board.

Masatsugu Asakawa President

16 June 2020

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Country’s Overarching Development Objective Social inclusion promoted and economic resilience improved (Strategic Action Plan 2019–2023)a

Results Chain Performance Indicators

with Targets and Baselines

Data Sources and Reporting Mechanismsb Risks

Effect of the Program Adverse socioeconomic effect of COVID-19 for poor and vulnerable groups mitigated

a. By October 2020, COVID-19 confirmed cases doubling rate improved to 30 days or more (May 2020 baseline: every 4 days)

b. By December 2020, at least 70% of businesses and 75% of women-led businesses that received working capital support still in business (March 2020 baseline: no support provided)

a.–c. MOF report

Prolonged economic slowdown affects business continuity and leads to further loss of income and employment.

c. By August 2020, 10,000 poor and vulnerable people (of whom at least 25% are women)c benefited from at least one economic assistance program under the government’s COVID-19 response plan (March 2020 baseline: 0)

d. By December 2020, at least 80% of surveyed beneficiaries supported by one or more support package are “generally satisfied” (using 5-point scale survey supported by online and/or IVR system),d with data disaggregated by sex, income group, industry, and rural and/or urban (March 2020 baseline: not applicable)

d. Beneficiary satisfaction survey

Reform Areas 1. COVID-19

health response measures implemented

1.1 By August 2020, COVID-19 testing facilities set up in 5 regional hospitals across 5 zones (May 2020 baseline: 2 facilities in the central zone)

1.1–1.4 MOF, MOH compliance reports

Lockdowns in other countries affect the supply of essential goods such as medicines and cause a rapid increase in prices and social unrest.

1.2 By August 2020, 200 critical care beds made available for COVID-19 treatment (May 2020 baseline: 35 critical care beds)

1.3 By August 2020, at least 400 isolation beds in health facilities made available with separate wards for men and women (May 2020 baseline: 178 isolation beds within Malé region)

1.4 By August 2020, testing capacity increased to 800/day (May 2020 baseline: 400 tests per day)

Appendix 1 17

Results Chain Performance Indicators

with Targets and Baselines

Data Sources and Reporting Mechanismsb Risks

2. Social protection measures implemented

2.1 By August 2020, cash assistance provided for 3 months to 4,000 poor and vulnerable households, including at least 1,500 vulnerable households led by single, widowed, divorced, or differently abled womene (March 2020 baseline: N/A)

2.1–2.6 MOF, MGFSS compliance reports

Restrictions on movement limit the beneficiaries’ access to banks and reduce the effectiveness of proposed measures.

2.2 By December 2020, at least 15,000 expatriate migrant workers transferred to safer accommodations in greater Malé, with separate accommodation for women (April 2020 baseline: 700 transferred to Gulhifalhu)

2.3 By June 2020, at least 45,000 households provided with 40% electricity subsidy and 30% water subsidy for April 2020–May 2020 (March 2020 baseline: 0)

2.4 By August 2020, 100% of eligible applicants are paid full allowance within 3 weeks from submission of completed applications (within 2 weeks from submission of completed applications for vulnerable women and differently abled applicants), in line with the COVID-19 Income Support Allowance Programf (March 2020 baseline: N/A)

2.5 By August 2020, at least 5 accommodation blocks for survivors of GBV within the family and child service centers in Malé and outer atolls rehabilitated and operational (with capacity of 100 individuals) (April 2020 baseline: 1 operational)

2.6 By December 2020, all COVID-19 patients (national and expatriates) provided with health coverage under health financing scheme (Aasandha) including outpatient and inpatient care (March 2020 baseline: 0)

3. Economic assistance measures implemented

3.1 By August 2020, 100% of eligible applications for working capital support from MSMEs and self-employed applicants with an annual turnover below Rf10,000,000 in 2019 (of which at least 18% are women-led businesses) under COVID-19 Viyafaari Ehee Loan schemeg

received the loan within 3 weeks from submission of completed applications (within 2 weeks for female applicants) (March 2020 baseline: N/A)

3.1–3.2 MOF, MED compliance reports

18 Appendix 1

Results Chain Performance Indicators

with Targets and Baselines

Data Sources and Reporting Mechanismsb Risks

3.2 By August 2020, at least 90% of eligible applications for working capital support from businesses and tourist resorts with annual turnover in 2019 above Rf10,000,000 (of which at least 10% are from female applicants) under COVID-19 Recovery Schemeh received the loan within 3 weeks from submission of completed applications (March 2020 baseline: N/A)

4. COVID-19 response governance mechanisms strengthened

4.1 By 31 March 2021, the annual report of the COVID-19 response trust fund published, including information on monthly progress in COVID-19 response for the first 3 months, and quarterly progress thereafter with data disaggregated by sex, age, and disability (December 2019 baseline: N/A)

4.1 MOF compliance report

4.2 By December 2020, a report identifying M&E capacity gaps for relevant government programs and strengthening of M&E systems containing recommendations for strengthening of M&E systems with data disaggregated by sex, age and disability completed and endorsed by government (May 2020 baseline: N/A)

4.2 MOF, MGFSS, MOH, and MED compliance reports

Budget Support ADB: $50.0 million ($25 million concessional loan and $25 million ADF grant)i and $0.5 million (TASF)

ADB = Asian Development Bank; ADF = Asian Development Fund; COVID-19 = coronavirus disease; GBV = gender-based violence; IVR = Interactive Voice Response; MED = Ministry of Economic Development; MGFSS = Ministry of Gender, Family, and Social Services; MOF = Ministry of Finance; MOH = Ministry of Health; MSMEs = micro, small, and medium enterprises; M&E = monitoring and evaluation; N/A = not available; OCR = ordinary capital resources; TA = technical assistance; TASF = Technical Assistance Special Fund. a Government of Maldives. 2019. Strategic Action Plan, 2019–2023. Malé. b The attached TA will support the government in producing these reports.

c Three months after loan approval, this gender target may be revised and updated. d IVR is an automated telephony system that can gather information from callers based on a combination of voice telephone input and touch-tone keypad selection. The criteria for assessing beneficiaries’ satisfaction will be developed with the executing agency.

e Disability assistance: Rf2,000/month per person; single parent benefit: Rf1,000/month/child. f The COVID-19 Income Support Allowance Program provides cash assistance to salaried employees and self-employed whose income was affected because of (i) loss of job or work, or (ii) forced leave without pay, or (iii) salary deduction. An allowance of Rf5,000 per month is provided for complete loss of income, and compensation in other cases is to top up to Rf5,000.

g The COVID-19 Viyafaari Ehee loan scheme will provide subsidized and collateral-free working capital loans for a maximum loan amount of Rf500,000 ($32,467) at 6% interest per annum, with a 6-month grace period and up to 3-year repayment period, to businesses with turnover of less than Rf10 million/annum in 2019.

h The COVID-19 Recovery Scheme will provide subsidized and collateral-free working capital loans for a maximum loan amount of Rf7.71 million ($500,000) for businesses with turnover above Rf10 million/annum in 2019.

i The $25 million ADF grant comprises (i) $5 million from the Vice President’s Savings and Cancellations for the 2020 program; (ii) $10 million from the Disaster Response Facility; and (iii) $10 million from the Strategy, Policy and Partnerships Department corporate pool. The $25 million concessional OCR lending is from the Disaster Response Facility.

Source: Asian Development Bank.

Appendix 2 19

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=54189-001-3

1. Loan Agreement

2. Grant Agreement

3. Development Coordination

4. Country Economic Indicators

5. International Monetary Fund Assessment Letter (Staff Report: Rapid Credit Facility, 22 April 2020)

6. Summary Poverty Reduction and Social Strategy

7. Risk Assessment and Risk Management Plan

8. List of Ineligible Items

9. Attached Technical Assistance Report

Supplementary Documents

10. Safeguards Assessment Matrix

11. Ongoing and Planned Regional Cooperation Initiatives

12. Government Schemes covered in the COVID-19 Health Response, Social Protection and Economic Assistance Package

13. Debt Sustainability Assessment

14. Maldives: Safe Tourism Guidelines (Draft)

20 Appendix 3

DEVELOPMENT POLICY LETTER

Appendix 3 21

22 Appendix 3

Appendix 3 23

24 Appendix 4

ASSESSMENT OF COMPLIANCE WITH THE COVID-19 PANDEMIC RESPONSE OPTION ACCESS CRITERIA

CARES Program’s Criteria and Indicators

ADB Staff Assessment 1. Adverse impact

of exogenous shocks

Travel restrictions within Maldives and worldwide have adversely impacted the travel and tourism industry. While the tourism industry in Maldives directly accounts for around 25% of GDP, it stimulates indirect economic activity in construction, financial services, manufacturing, food, and entertainment sectors, with an estimated overall contribution of 75% to the island nation’s GDP. The government estimates about 50.0% decline in tourist arrivals in 2020 from the pre-pandemic expectation if the borders are opened in July 2020. Correspondingly, the GDP growth in 2020 is estimated to decline from a pre-pandemic estimate of 7.5% to –11.3%, and with a serious downside risk. In the worst-case scenario, which assumes that borders will be opened in January 2021, the tourist arrivals can decline by 78% with a corresponding decline in GDP by 29.7%. Fall in tourism earnings will add to the fiscal stress. Tourism revenue,

including earnings received from tourism goods and services tax, green tax,

tourism land rent, and lease period extension fee, accounts for around 35% of

government revenue. If tourism’s indirect effect on other sectors is included, the tourism-dependent revenues comprise about 50% of total government

revenue. If the decline in tourist arrivals continues for an extended period, the

government estimates that its annual revenue in 2020 is likely to drop by half

of its pre-COVID-19 budget estimate to $990.9 million. Even with strict

expenditure rationalization and reduction by almost 20% from budget

expenditure in 2020, the fiscal deficit in 2020 will rise to 13.7% of GDP (from

5.7% in 2019) even after rationalization of non-priority current and capital

expenditure. The government is severely resource constrained. The additional

financing requirement to meet COVID-19-related expenditures is $450 million

over and above the budgeted fiscal deficit in 2020.

High external vulnerabilities. Merchandize export, particularly of tuna fish, is

expected to drop as all of Maldives’ leading export destinations—Thailand,

Germany, United Kingdom, United States, and France—are suffering from the

COVID-19 pandemic. Meanwhile, imports are expected to fall more as both

tourist arrivals and investments decline sharply. Consequently, the current

account deficit is estimated to decline from 26% of GDP in 2019 to 21% in 2020

but the overall balance will worsen to –7.1% of GDP in 2020 (from 0.7% of GDP

in 2019). As a result, gross international reserves coverage, in months of

goods, and non-factor services imports, is expected to decline from 2.9 months

in 2019 to 2.0 months in 2020 (IMF).

Impact on the job market. The disruption in economic activities has affected

the labor market. In terms of sector, job losses are expected to be the highest

in agriculture, businesses and trade, and construction, and manufacturing. It is

estimated that job losses could be in the range of 11,000 to 27,000 under ADB’s current smaller shock and larger shock scenarios for the impact of COVID-19

on Maldives’ economy.

Appendix 4 25

CARES Program’s Criteria and Indicators

ADB Staff Assessment Impact on migrant workers. Migrant workers constitute about 88% of the

workforce in construction and more than 50% in the tourism and hotel industry,

the sectors hit by the pandemic. Most of the migrant workers, who otherwise

work in shifts, have lost their jobs during the COVID-19 pandemic and are now

compelled to live in extremely congested conditions. Out of the reported

positive COVID-19 cases, two-thirds are non-Maldivians, and more than half

are from Bangladesh. While the government has taken steps to support the

migrants, including opening a dedicated clinic on Hulhumalé’ island, near the

capital Malé, much needs to be done to ensure safer living conditions for

migrant workers.

Impact on poverty. With an assumed reduction in per capita consumption

expenditure by 20% under COVID-19 related restrictions, ADB estimates that

the $3.2/day IPL poverty headcount ratio will increase more than three times

from 0.4% in 2018 to 1.3% in 2020. The $5.5/day IPL poverty headcount ratio

will almost double from 5.6% in 2018 to 10.5% in 2020.

Impact on women. Women will be affected more in the current pandemic as

around 40% of them (compared to about 30% men) are in the informal sector

with no job security. According to a survey done by the UN Women’s Regional Office for Asia and the Pacific (ROAP) in April 2020, 26% of women engaged

in informal work said that they lost their jobs. In the health sector, 90% of the

nurses are women and vulnerable to COVID-19 infection risk as frontline

workers. Women are also vulnerable to increased domestic violence (GBV),

which has been found to increase during every type of emergency. 14 cases of

violence against women were formally submitted to the Ministry of Gender,

Family, and Social Services (MGFSS) during 15 April 2020 to 12 May 2020.

2. Countercyclical development expenditures

The government has introduced (i) countercyclical expenditure program (the COVID-19 response package) focused on addressing the immediate needs of the poor and vulnerable, and business for 3 months while stepping up the health sector response, and (ii) monetary measures for improved liquidity and maintaining financial and exchange rate stability. The government’s countercyclical expenditure program of $351 million consists of (i) COVID-19 pandemic response plan targeting upgradation and provision of health facilities and supplies to support public health ($97 million); (ii) COVID-19 social protection package for the vulnerable population such as the unemployed, poor, and vulnerable households, gender-based violence survivors, and expatriate migrant workers, and subsidies to households on electricity and water bills ($124 million); and (iii) COVID-19 economic response providing subsidized working capital to the self-employed and businesses ($130 million).

3. Pre-shock record of generally sound macroeconomic management

Maldives has consistently maintained a high economic growth, averaging 7.2% annually during 1980–2015, primarily backed by development in tourism, and fishing, and construction. More recently, annual GDP growth averaged 6.5% during 2016–2019. Before the pandemic, both ADB and the IMF had projected GDP growth to accelerate in 2020 and continue on a strong path in the medium term, driven by continued strong tourism growth. During 2014–2019, the tax to GDP ratio averaged 19.4% and the total revenue (excluding grants) was 26.4% as ratio of GDP. Further increase in tax revenues was projected in 2020 before

26 Appendix 4

CARES Program’s Criteria and Indicators

ADB Staff Assessment the pandemic with the introduction of personal income tax and amendments to airport service charge and airport development fee. From 2016 to 2019, consumer price inflation remained low averaging 0.9%. The fiscal deficit went up to 10.0% of GDP in 2016 as the government launched a few major infrastructure projects and as a result, the current account deficit also expanded to 23.5% of GDP that year despite strong tourism receipts. Since then, the fiscal deficit had shrunk to 5.7% of GDP in 2019, but the current account deficit remained high at 26.1% of GDP in 2019. The finance sector remains broadly sound. Since 2011, Maldives has undertaken substantial, and fast-track reforms to widen its tax base with assistance from ADB, which include: (i) introduction of new taxes (goods and services tax [GST], green tax, business profit tax, and personal income tax); (ii) establishing a revenue authority; and (iii) system modernization. In particular, a general GST regime was implemented within only one month from the presidential ratification of the empowering law.a A number of public financial management (PFM) reforms have been undertaken for improved planning, budgeting, monitoring, accounting, and transparency. The IMF and World Bank are helping the government develop a new PFM strategic plan. The IMF acknowledges that the government is taking welcome steps to improve governance, transparency, and resilience to climate change, and its commitment to macroeconomic stability and ambitious reform agenda for sustaining growth. On the monetary side, MMA has maintained an accommodative stance in recent years as credit grew faster than the nominal GDP growth while the overall inflationary pressures remained low. The local currency is pegged to the United States dollar. The foreign exchange rationing to banks sometimes triggers foreign exchange shortage that has led to an active parallel market. MMA is also working together with the IMF to improve its policy transmission through gradual de-dollarization and adoption of a more appropriate exchange rate regime to maintain price stability.

4. Structural reforms

The government initiated its COVID-19 response preparations even before the first case was detected in Maldives. On 3 March 2020, as part of its precautionary steps, the government established a COVID-19 Task Force including representatives from the Ministry of Health (MOH), President’s Office, Ministry of Tourism (MOT), Ministry of Defense, Maldives Police Services, and other government agencies for overall pandemic response planning and monitoring. It established a National Emergency Operations Centre (NEOC) at the National Disaster Management Authority (NDMA) to oversee the activities of stakeholder agencies. The government declared a public health emergency on 12 March 2020, initially for 30 days, and currently extended until 29 June 2020. International travel was restricted and a lockdown imposed in the greater Malé’ region until 11 June 2020. On 20 March 2020, a COVID-19 Response Trust Fund Committee was set up for the oversight and management of unemployment benefits, subsidy on electricity and water bills to households, and the government’s economic response through subsidized working capital loans. The committee is chaired by the finance minister and has representation from the Ministry of Economic Development (MED), MOT, and MMA. While the government implemented social distancing norms and closed public spaces and offices, it also closed its international borders for tourists. The

Appendix 4 27

CARES Program’s Criteria and Indicators

ADB Staff Assessment government took proactive decision to access support from WHO, the UN agencies, and other regional governments.

5. Debt sustainability

ADB’s CPRO policy paper advises the following in Appendix 1 para. 1(v) “In the case of the CPRO, the expansion of eligibility to include group A DMCs means that many will be at high or moderate risk of debt distress. To be eligible for CPRO support, all DMCs must be able to demonstrate that the assistance provided by ADB will be integrated into a fiscal framework that does not jeopardize the borrower’s debt sustainability or exacerbate weaknesses in fiscal sustainability.” In its April 2020 DSA after considering the effect of COVID-19, and including ADB’s CARES Program, the IMF assessed Maldives’ public debt as sustainable but at high risk of debt distress subject to rapid recovery in growth and the authorities' commitment to reprioritize and cut capital expenditures and active debt management including accumulation of liquid assets in the Sovereign Development Fund. ADB’s DSA uses more conservative assumptions based on revised government estimates. In 2019, the total PPG debt-to-GDP ratio was 76.9%. ADB’s DSA expects the PPG debt-to-GDP ratio to peak at 96.5% in 2020 and eventually fall to 78.8% by 2025 as the government commits to reprioritize and cut capital expenditure in the short term and fiscal consolidation in the medium term. The IMF and ADB assessments concur that debt is sustainable but Maldives continues to be at high risk of debt distress with most debt indicators expected to fall to within the thresholds before 2030. ADB’s lending constitutes less than 0.5% of GDP in 2020. Compared to borrowing from international markets, external assistance from ADB, AIIB, World Bank, OFID, IFAD, and IsDB would reduce the debt-to-GDP ratio by about 1.3–1.6 percentage points during 2020–2025. External PPG debt will also rise but is sustainable in the medium term. The external PPG debt-to-GDP ratio will be a little over 50% in 2020 as the country borrows more externally than domestically. The external debt sustainability indicators breach their thresholds under the baseline scenario, but are expected to fall to within the thresholds before 2030.b Rollover risks from the repayment of two outstanding international sovereign bonds of $350 million are mitigated by accumulation of foreign exchange resources in the SDF. The risk of high external debt distress is further mitigated by an effort to obtain concessional loans and grants to the extent possible.

6. Coordination with the IMF

ADB has been in close contact with the IMF on the ongoing measures to respond to the COVID-19 pandemic including joint IMF-World Bank-ADB meetings on 23 March 2020 and 14 April 2020. ADB, World Bank, IMF, IsDB, and other UN agencies, such as UNICEF, UNDP, and IOM held several consultations on possible coordinated support for Maldives. ADB has closely coordinated with the IMF with regular exchange of information, including joint IMF-World Bank-ADB meetings on 23 March and 14 April 2020. ADB shared updates about the proposed CPRO with the IMF during consultations, and the IMF incorporated ADB program in its assessments. On 22 April 2020, the IMF approved a $28.9 million Rapid Credit Facility (RCF) for Maldives. The IMF assessment is provided through the RCF staff report.

ADB = Asian Development Bank, BPT = business profit tax, CARES = COVID-19 Active Response and Expenditure Support, COVID-19 = coronavirus disease, CPRO = COVID-19 Pandemic Response Option, CSF = countercyclical

28 Appendix 4

facility, DSA = debt sustainability assessment, GDP = gross domestic product, IFAD= International Fund for Agriculture Development, IMF = International Monetary Fund, IOM = International Organization for Migration, IsDB = Islamic Development Bank, MED = Ministry of Economic Development, MMA = Maldives Monetary Authority, MOT = Ministry of Tourism, OFID = OPEC Fund for International Development, PFM = public financial management, RBI = Reserve Bank of India, RCF = Rapid Credit Facility, SOP = standard operation procedure, UN = United Nation, UNDP = United Nations Development Programme, UNICEF = United Nations International Children’s Emergency Fund, WHO = World Health Organization. a ADB. 2017. Fast-Track Tax Reforms- Lessons from Maldives. Manila. b For weak debt-carrying capacity countries, the threshold is 30% for present value of external debt as a percent of

GDP and 35% for present value of total public debt to GDP. Source: Asian Development Bank.